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The international business of Federated Hermes (formerly Hermes Investment Management)

PRI reporting framework 2020

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You are in Direct - Fixed Income » ESG incorporation in actively managed fixed income » (A) Implementation: Screening

(A) Implementation: Screening

FI 04. Types of screening applied

04.1. Indicate the type of screening you conduct.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Securitised
Negative/exclusionary screening
Positive/best-in-class screening
Norms-based screening

04.2. Describe your approach to screening for internally managed active fixed income

​We adopt a firm-wide exclusion policy of companies that produce cluster munitions and/or anti-personnel landmines.

If a name appears on the Credit team's exclusion list, it is eliminated from the investment universe. These covers companies involved in the manufacturing or distribution of Controversial Weapons (predicated on the principles of the UNGC) or any names that receive an ESG score of five. For the newly-launched SDG Engagement High Yield Fund, additional exclusions include manufacturers of tobacco. (Although tobacco does not appear on a firm-wide exclusion list, the credit team has no exposure to tobacco.) For other scores, the team looks at whether or not the company's ESG behaviours are improving and if the company demonstrates an earnest desire to improve. In this way, companies that optically score poorly could be investment opportunities. If a company makes it through the exclusion list (e.g. no controversial weapons involvement, Credit ESG score of better than five), the Credit team can include it in its investment universe.

The Direct Lending strategies do not invest in any transaction exposed to certain industries and practices, including gambling, tobacco, distilled alcohol, pornography, weapons & munitions, GMO, fur trade, ship breaking, shark finning and cosmetics tested on animals.

04.3. Additional information. [Optional]

 

Moreover, as with all other scores, the credit team not only analyses the ESG risks, but also attempts to price them on an outright and nominal basis. If the analyst can provide a choice between two names at similar spread levels but of varying ESG quality, the portfolio manager will choose the one with the better ESG scores; the portfolio manager is less likely to select or build significant positions in names with a troubled ESG record.

The Public credit team do not have any norms-based exclusions for the mainstream credit funds. However, they do upload the quarterly controversial company reports produced by EOS to the coverage database in order to ensure that the analysts are aware of any changes to the list and capture materiality in financial risk from non-fundamental factors. 

The Private Debt team considers ESG items as part of the credit analysis undertaken for each potential investment. ESG considerations are tabled at the Private Debt Investment Committee as part of the research presented for all new transactions.

For our Direct Lending team, the key is to identify meaningful ESG risks, both current and potential, before investing. Due to the difficulty of divesting and the capped upside, it is important to manage the downside ex ante. The Direct Lending team operates a three-pillar approach to ESG analysis:

  1. Excluded Industries: The Direct Lending strategies are prevented from investing in any transaction exposed to certain industries and practices, including gambling, tobacco, alcohol, weapons, GMO, animal testing and businesses with a negative ecological footprint on natural habitats. This is because the Direct Lending team does not think that investors are remunerated for the ESG risks associated with these industries.
  2. Enhanced Due Diligence: Any potential investment exposed to certain industries is subjected to enhanced due diligence, including engaging with the Federated Hermes Responsibility team and  EOS, as appropriate. These industries include energy, chemicals, forestry and agricultural commodities, manufacturing and mining and metals.
  3. Transaction-specific ESG Analysis: Each potential investment is analysed at a granular level across the three ESG components, with the analyst identifying potential company and sector-specific ESG risks and mitigants. The analyst assigns a low, medium or high rating to each component. The Direct Lending team do not invest in companies with a ‘high’ risk assigned to any of the E, S or G factors pre-investment.

Information on flood risk is provided by the borrower along with professional independent valuation, EPC rating and financial information as a condition precedent to lending and then annually throughout the term of the loan. Flood risk for UK is measured in line with the UK Environment Agency flood maps and can be verified by Federated Hermes through this source. If any risk of flood is identified, a mitigation or action plan is required from the borrower and reviewed at least annually throughout the term of the loan.


FI 05. Examples of ESG factors in screening process

05.1. Provide examples of how ESG factors are included in your screening criteria.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

Federated Hermes Credit do not hold any aerospace names because of controversial weapons.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

The Direct Lending strategies are prevented from investing in any transaction exposed to certain industries and practices, including gambling, tobacco, distilled alcohol, pornography, weapons & munitions, GMO, fur trade, ship breaking, shark finning and cosmetics tested on animal. 

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

The Direct Lending strategy is prohibited from in investing in any transaction where any of the E, S or G components have been assigned a “5/Very High”  rating by the analyst (ratified by Private Debt Investment Committee).

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

We exclude companies which receive a rating of 5 (the worst rating) on our internal Credit ESG rating.
Hermes SDG Engagement High Yield Credit strategy excludes manufacturers of tobacco and controversial weapons.
 

05.2. Additional information.


FI 06. Screening - ensuring criteria are met

06.1. Indicate which systems your organisation has to ensure that fund screening criteria are not breached in fixed income investments.

Type of screening
Checks
Negative/exclusionary screening

06.2. Additional information. [Optional]


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